Tuesday May 18, 2010 - 20:28:23 GMT
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Westpac Institutional Bank - www.westpac.co.nz
Forex Research - Morning Report (Westpac)
Morning Report Wednesday 19 May 2010
News and views
Markets were rattled by news reports of market controls in the Eurozone. After the European session, it was reported that from tonight, Germany will ban naked short-selling of some German financial institution stocks and Eurozone government bonds, with related CDS' also captured by the restriction. The markets are awaiting further details, but the headlines so far have hurt the EUR and US equities. The S&P500 is down 0.8%, with banks 3.4% lower. Commodities have been less affected by the news, the CRB index up 0.7%, copper rebounding 2,7%, but oil -0.7%. US 10yr treasuries are 9bp lower in yield, the back-end leading a curve flattening of 5bp, a weaker PPI report also influential. Fed moderate Pianalto talked about the risk of dampened growth resulting from Europe's woes.
The US dollar index is stronger after the short selling news, although an earlier rebound in risk appetite, reflected in Chinese and European equity gains saw safe havens dollar and yen weaken. EUR initially rose to 1.2444 during the European morning, but the short-selling news knocked it down to 1.2256, close to the recent low of 1.2235. USD/JPY slipped overall to 92.20 on safe haven yen buying.
AUD ranged to 0.8790, but among the majors was the worst affected by the latest risk-averse news, and is currently at a fresh post-February low of 0.8665.
NZD fell from its evening high of 0.7040 to 0.6945. AUD/NZD fell from 1.2535 to 1.2465.
US housing starts jumped 5.8% in Apr, led by single family homes (multiples fell sharply), but housing permits fell 11.5%, more than eliminating permits' previous lead over starts - perhaps a sign that the end of the tax credit for homebuyers in April is already impacting on future construction activity.
US producer prices fell 0.1% in Apr, with gasoline, gas, food and truck prices declining, although core prices rose 0.2% with autos up 0.6%.
Japanese tertiary activity index fell 3.0% in March, up 1.6%yr. This was much weaker than the rate of decline expected by the market. A major factor in the fall was the weakness of wholesale activity, which presages a somewhat soft start to Q2. The scale of today's fall leaves us comfortably below market for Thursday's GDP update.
Euroland inflation was confirmed at 1.5% yr in April, unrevised from the flash estimate. The core rate softened from 1.0% yr in March to 0.8%, the lowest on record. Also the trade balance printed its 13th consecutive surplus of EUR600mn in March, with both imports and exports rising.
German ZEW analysts' survey fell from 53.0 to 45.8 in May, reversing most of April's jump. That was the steepest decline since the Lehmans collapse, and reflects concern the fiscal crisis in Europe will derail the nascent economic recovery. On that point, EU finance ministers said there would not be a "continent wide austerity drive", with only Greece, Portugal and Spain required to slash their deficits, so as not to derail the emerging recovery.
UK CPI jumped from 3.4% to 3.7% yr in April, highest since late 2008, with VAT, petrol prices and the weaker pound key drivers. The ongoing breach of the 3% target upper limit required BoE Governor King to write another open letter. He said that "the MPC expects that inflation will fall back. Nevertheless, inflation has been somewhat higher than expected over the past year and the Committee is conscious that the pace and extent of the prospective fall in inflation are highly uncertain. It will monitor developments closely."
AUD/USD and NZD/USD outlook next 24 hours: AUD is breaking lower to a new 0.8600-0.8700 range. NZD should also trade in a lower range today of 0.690
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